6. Inflation becomes an issue of concern. Continued world GDP growth puts pressure on commodity prices. Tight labor markets in the industrialized countries create wage increases. In the United States, average hourly earnings gains approach 4 percent and the Consumer Price Index pushes above 3 percent.
7. With higher inflation, interest rates begin to rise. The Federal Reserve increases short-term rates four times in 2018 and the 10-year U.S. Treasury yield moves toward 4 percent, but the Fed shrinks its balance sheet only modestly because of the potential impact on the financial markets. High yield spreads widen, causing concern in the equity market.
8. Both NAFTA and the Iran agreement endure in spite of Trump railing against them. Too many American jobs would be lost if NAFTA ended, and our allies universally support continuing the Iran agreement. Trump begins to think that not signing on to the Trans-Pacific Partnership was a mistake as he sees the rise of China’s influence around the world. He presses for more bilateral trade deals in Asia.
9. The Republicans lose control of both the Senate and the House of Representatives in the November election. Voters feel disappointed that many promises made during Trump’s presidential campaign were not implemented in legislation and there is a growing negative reaction to his endless Tweets. The mid-term election turns out to be a referendum on the Trump Presidency.
10. Xi Jinping, having broadened his authority at the 19th Party Congress in October, focuses on China’s credit problems and decides to limit business borrowing even if it means slowing the economy down and creating fewer jobs. Real GDP growth drops to 5.5 percent, with only minor implications for world growth. Xi proclaims this move will ensure the sustainability of China’s growth over the long term.
(https://www.blackstone.com/media/press-releases/byron-wien-announces-ten-surprises-for-2018)
Whatever your predisposition, there’s plenty to both like and dislike in there. On #7, I think 10-year Treasury bonds at 4 percent or more will look like the end of the world to younger folks. It’s been more than a decade since we saw any such thing, and at that point they were falling, not rising. But if he’s correct that CPI pushes over 3 percent, then bond yields have to rise.
Personally, I think I would take the other side of that bet. I think the yield on the 10-year actually has a chance to fall.
On another note: If Byron is right that “speculation reaches an extreme,” the resulting correction will be a lot deeper than 10 percent. I don’t think we are there yet and probably won’t reach that point in 2018. But we will get there eventually.
All right, my stack of New Year’s predictions is barely any smaller, but we’ll stop here and pick up again next week.